Personal Finance

This costly Social Security mistake could result in years of regret

Key Points
  • Age 62 is the most popular age to claim Social Security — around 29% of men and 33% of women do so.
  • Social Security paychecks increase 8% each year a retiree waits to claim benefits, up to age 70.
  • Drawing down financial portfolios or working a little longer often makes more financial sense than claiming benefits earlier than needed. 
Jose Luis Pelaez Inc

Retirees can boost their Social Security payments substantially by avoiding one costly, yet common, mistake.

Americans can claim Social Security benefits as early as age 62. While it may be tempting to begin receiving that monthly income as soon as possible, retirees could leave a lot of money on the table by doing so.

That's because Social Security payments are larger the later retirees claim them.

Someone who claims at age 62 would get a monthly check that's 30% smaller than someone claiming at "full retirement age," according to the Social Security Administration. Full retirement age is 67 for those born in 1960 or later.

Retirees get a monthly paycheck that's 8% larger each year they wait, between ages 62 and 70. These payments are guaranteed, inflation-protected and last as long as an individual lives.

That's why financial experts recommend waiting to claim Social Security as long as possible — age 70, ideally — since claiming early essentially amounts to a penalty. Plus, they wonder where else a retiree could get a guaranteed 8% annual investment return that adjusts with inflation.

"It pays to wait," said Joel Eskovitz, a senior policy advisor with the AARP Public Policy Institute. "It really is the best game in town. You wouldn't be able to beat that on the open market, certainly without taking some risk."

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Consider this example, provided by the Social Security Administration, of someone who turns 62 this year and who would receive $1,000 per month from Social Security at full retirement age. Claiming at age 62 would yield a $716 monthly benefit. Waiting until 70 would provide $1,266 — a difference of $550.

Claiming early could also adversely impact a retiree's spouse. In many cases, when a retiree dies the surviving spouse receives the same monthly check as the deceased. Thus, taking benefits early would leave the surviving spouse with a smaller monthly check for life.

"When you claim, Social Security impacts you for the remainder of your life," Eskovitz said.

However, few people wait until 70 to claim.

Age 62 is the most popular age to claim Social Security — around 29% of men and 33% of women do so. Only around 5% wait until 70. The average claiming age hovers between 64 and 65 for men and women.

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More than 5 million Americans started collecting Social Security benefits in 2018, receiving an average monthly benefit of $1,461.

According to a joint survey published Thursday by Kiplinger and Personal Capital, roughly 21% of those ages 55-64 would consider claiming Social Security earlier than planned if the stock market fell by at least 25%.

Financial advisors recommend avoiding a knee-jerk reaction in this market scenario, and looking for alternative ways to make ends meet, even if just for a year.

That means tapping other financial resources like 401(k) plans and individual retirement accounts. Retirees could draw income from cash and bonds while allowing stocks to recover from losses.

It pays to wait. It really is the best game in town.
Joel Eskovitz
Senior policy advisor at the AARP Public Policy Institute

While investors would likely "feel ill" when thinking of a 25% market decline, a retiree's overall portfolio probably wouldn't decline that much since investors generally shift away from stocks as they age, said Michael Zmistowski, a financial planner based in Tampa, Florida.

Working longer, while an unpopular notion, is one of the most impactful things individuals can do instead of claiming Social Security, said Kyle Ryan, executive vice president of advisory at Personal Capital.

Even working part time to supplement income from one's financial portfolio could help, Eskovitz said.

However, there are situations in which it could make sense to claim Social Security early, such as for retirees with significant health issues or pressing financial needs that can't be addressed by other means, according to Eskovitz.

Retirees who delay Social Security should still apply for Medicare benefits within three months of their 65th birthday, otherwise Medicare medical insurance (Part B) and prescription drug coverage (Part D) may cost more money, according to the Social Security Administration.

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